Executive forum
The impact of the Basle capital adequacy ratio
regulation on the financial and marketing strategies
of Islamic banks
Reports that, unlike Western
commercial banks, Islamic
banks are prohibited by
Islamic precepts to receive or
pay interest, inter alia, in all
their transactions. Argues
that the Basle capital ade-
quacy ratio (CAR), which was
implemented in 1992 by
regulatory authorities in many
countries, is irrelevant to
Islamic banks because it does
not accommodate, among
other things, one of the major
instruments – investment
accounts – through which
Islamic banks mobilize funds
on the basis of profit sharing.
Develops four possible sce-
narios for the treatment of
these accounts in the calcula-
tion of CAR and examines
their impact on the financial
and marketing strategies of
Islamic banks in the light of
the risk-return relationship
between the funds contribu-
tors of these banks.
This paper was written
before the author’s appoint-
ment as Secretary-General.
The views expressed in the
paper are the author’s and
do not necessarily represent
those of either the named
institution or any other
organizations. The author
would like to thank Roger
Groves, David Llewellyn, the
participants at the 9th
expert level meeting on
Islamic banking, Jakarta, 7-
8 April 1995, and an anony-
mous referee of this journal
for helpful comments on an
earlier version of the paper.
The usual caveats apply.
International Journal of
Bank Marketing
14/7 [1996] 32–44
© MCB University Press
[ISSN 0265-2323]
[ 32 ]
Rifaat Ahmed Abdel Karim
Secretary-General, Accounting and Auditing Organization for Islamic Financial
Institutions, Manama, State of Bahrain
In his speculative projections of the strategic
issues of the 1990s for the banking industry,
Llewellyn (1992) claims that:
competitive and regulatory pressures are
likely to reinforce the central strategic issue
of capital and profitability, and accentuate
the role of the availability and cost of equity
capital in shaping banking strategies (p. 24).
The recent Third World debt crisis seems to
have triggered the demand for more capital
regulation in the banking industry, particu-
larly those banks with huge international
investments. Capital adequacy ratio (CAR) is
one of the key measures which regulators use
as a buffer against credit risk to which banks
are exposed.
Banks which do not satisfy CAR require-
ments are likely to incur a wide range of
regulatory costs. Non-complying banks can
be asked to submit comprehensive plans
describing how capital will be increased, can
be denied a request to merge or open new
branches, or can be exposed to stringent divi-
dend restrictions. According to Moyer (1990),
to reduce regulatory costs imposed by CAR
regulators some bank managers tend to
adjust accounting measures.
In recent years, there has been a resurgence
of the Islamic faith in almost all areas with a
substantial Muslim population (e.g. Iran,
Pakistan, Sudan, Egypt and Algeria). Islam
does not entertain the dichotomy between
spiritual and temporal affairs of life. This
means business transactions must be con-
ducted in consonance with the Shari’a[1]
precepts. The Shari’a prohibits, inter alia, the
receipt and payment of riba[2], gambling,
hoarding, and speculation. Similarly, invest-
ments in the shares of companies that deal in
alcohol or pork are also considered by the
Shari’a as unlawful[3].
This call for strict observance of Islamic
precepts seems to have led to a growing
demand for the introduction of business orga-
nizations that adhere to the Shari’a in their
financial transactions[4]. Islamic banking
can be considered as one of the major finan-
cial innovations which has been developed as
a response to this demand.
Islamic banks are now well established in
most countries in the Middle East and in
many countries in Asia and Europe. Some
countries (e.g. Pakistan, Iran and Sudan)
have “islamized” their whole banking indus-
try while others (e.g. Malaysia, Bahrain,
Turkey and Jordan) have adopted a heteroge-
neous banking system in which one or more
Islamic banks compete with Western-type
commercial banks. Some of the latter type of
banks have responded by opening branches
that operate in accordance with the Shari’a
in an attempt to compete in this growing
niche of the banking market.
On the other hand, the rapid growth in the
size and number of Islamic banks seems to
have led regulatory authorities to appreciate
the need to develop appropriate measures
that would enable them to control the opera-
tions of these banks which differ substan-
tially from those of their Western capitalist
counterparts. The application of the CAR
measure to Islamic banks is likely to be an
issue of contention between these banks and
their regulatory authorities. Indeed, accord-
ing to The Banker (1988):
Kuwait Finance House forcefully points out
the irrelevance of what it calls the ‘tradi-
tional” capital-adequacy ratio of commer-
cial banks.
Recently, the Basle Committee on Banking
Regulations and Supervisory Practices
(1988)[5] has proposed the application of a
CAR framework to (Western) commercial
banks which should:
1 serve to strengthen the soundness and
stability of the international banking
system; and
2 be fair and have a high degree of consis-
tency in its application to banks in differ-
ent countries with a view to diminishing
an existing source of competitive
inequality among international banks
(para 3).
This paper argues that the proposed CAR
framework does not cater for the unique char-
acteristics of one of the major instruments –
investment accounts through which Islamic
banks mobilize funds on the basis of profit
sharing. The paper proposes four scenarios
for the calculation of CAR and examines their
implications on the financial and marketing
strategies of Islamic banks. It is argued that
both the financial and marketing strategies of
an Islamic bank would be contingent on the
Rifaat Ahmed Abdel Karim
The impact of the Basle
capital adequacy ratio
regulation on the financial
and marketing strategies of
Islamic banks
International Journal of
Bank Marketing
14/7 [1996] 32–44
scenario to be adopted by regulatory authori-
ties for the treatment of profit sharing invest-
ment account (PSIA) financing. This in turn
would determine whether shareholders of
Islamic banks would be able to avail them-
selves of the benefits of high investment
accounts financing while keeping their
equity capital at a minimum to increase their
rate of return at no extra risk.
The remainder of the paper is organized as
follows. First, the CAR framework proposed
by the Basle Committee is presented and the
financial system of Islamic banks is
described. Four scenarios for the treatment of
investment accounts for the calculation of
CAR are then developed and the implications
of the four scenarios on the financial and
marketing strategies of Islamic banks are
examined, followed by the concluding
remarks.
The Basle CAR framework
The CAR is a measure of a bank’s risk expo-
sure. Regulatory authorities use CAR as an
important measure of:
“safety and soundness” for depository insti-
tutions because they tend to view capital as
a buffer or cushion for absorbing losses
(Sinkey, 1989, p. 10).
In recent years, the CAR has received consid-
erable attention by regulatory authorities
around the world. This culminated in July
1988 in the formal adoption of the Basle
Accord[6] by representatives of several Euro-
pean countries, Canada and the USA.
The Accord, which was implemented in
1992:
sets out the details of the agreed framework
for measuring capital adequacy and the
minimum standards to be achieved which
the national supervisory authorities repre-
sented on the [Basle] Committee intend to
implement in their respective countries
(Committee on Banking Regulations and
Supervisory Practices, 1988, para 1).
In arriving at the CAR of a bank, the proposed
framework relates capital to its total assets
weighted by their risk. The Accord stipulates
that by 1992 the minimum acceptable ratio of
a bank’s capital to risk-weighted assets
should be 8 per cent.
Capital is split between Tier 1 or core capi-
tal (equity[7] and published reserves from
post-tax retained earnings) and Tier 2 or
supplementary capital (unpublished
reserves, asset revaluation reserves, general
provisions and loan loss reserves, hybrid
debt/equity instruments and subordinated
term debt). National discretion is allowed
over the inclusion of the individual Tier 2
elements. Tier 1 capital must be equal to a
minimum of 4 per cent of risk assets. Tier 2
elements must not exceed 50 per cent of the
combined total of both Tiers. In addition,
subordinated debt must not exceed 50 per
cent of Tier 1; general provisions are limited
to a maximum of 1.25 per cent of risk assets;
and latent asset revaluation reserves are to be
discounted by 55 per cent.
On the other hand, goodwill and other
intangible assets as well as published or
unpublished current year losses must be
deducted from Tier 1 capital, while invest-
ments in unconsolidated financial
subsidiaries must be deducted from total
capital. The exclusion of holdings of other
banks’ capital is at national discretion.
Capital is then related to different cate-
gories of assets weighted according to broad
categories of relative riskiness. The credit
risk weightings (0 per cent, 20 per cent, 50 per
cent and 100 per cent) of on-balance sheet
assets depend on whether the bank is doing
business with central governments, public
sector entities, banks or non-bank organiza-
tions. For the former three categories, certain
distinctions are made between OECD (Orga-
nization for Economic Co-operation and
Development) members and non-OECD mem-
bers. The latter attracts a high risk weight-
ing. With the off-balance sheet items, the
framework proposes a two-step process. First
the credit equivalents are calculated, then the
credit risk.
The majority of countries in which Islamic
banks operate have already taken steps to
introduce the Basle framework. However, as
will be shown in the next section, the parame-
ters of the financial system of Islamic banks
are quite different from those of Western
traditional commercial banks for which the
Basle framework was geared. As far as this
author is aware, there has hardly been any
attempt by the concerned regulatory authori-
ties in the countries in which Islamic banks
operate to adjust the framework to cater for
the unique characteristics of Islamic banks.
As will become evident later in the paper, this
is likely to impact on the financial and mar-
keting strategies of Islamic banks.
The financial system of Islamic
banks
The prohibition of interest means that
Islamic banks cannot incur or earn interest
in any of their financial transactions. Hence,
Islamic banks are not in the business of lend-
ing money to the public or borrowing from
it. Rather, these banks mobilize funds on
bases that are quite different from those of
[ 33 ]
Rifaat Ahmed Abdel Karim
The impact of the Basle
capital adequacy ratio
regulation on the financial
and marketing strategies of
Islamic banks
International Journal of
Bank Marketing
14/7 [1996] 32–44
[ 34 ]
traditional commercial banks and use dis-
tinct financial instruments in their uses of
funds.
Sources of funds
In their mobilization of funds, Islamic banks
currently depend on four main sources of
funds. These are shareholders’ funds, current
accounts, investment accounts and savings
accounts[8]. The sources of funds of Islamic
banks do not, however, include bonds or
debentures because of the interest paid on
these securities.
Shareholders’ funds are the only source of
equity funds raised by the bank through the
sale of common shares to the public. They
also include any reserves accumulated by the
bank over the years. Shareholders have sole
control over the management of the bank. No
preferred shares are issued by Islamic banks
because holders of these shares are paid a
fixed dividend which is prohibited by Shari’a.
Current accounts are similar to the ser-
vices of cheque accounts which are offered by
traditional commercial banks. Customers of
Islamic banks benefiting from the service of
current accounts have the right to withdraw
their funds on demand, but they are not enti-
tled to receive any returns on their current
funds[9]. The revenues generated from invest-
ing the funds deposited in accounts are the
exclusive right of the shareholders because,
in case of loss, holders of these accounts
would be paid from the shareholders’
funds[10].
In most Islamic banks PSIAs usually consti-
tute the largest source of funds. These
accounts are not a liability, nor can they be
considered as equity funds[11]. Rather, they
are financial instruments which give Islamic
banks the right to invest funds deposited in
these accounts on behalf of their holders on
the basis of profit sharing. PSIAs are not paid
a predetermined rate of return and, like
equity capital, are free of contractual servic-
ing obligations (i.e. they are serviced only in
the event that the bank is profitable). Accord-
ingly, they do not constitute a financial risk to
the bank.
Holders of PSIAs deposit their funds with
the bank under the understanding that the
latter is empowered with full and absolute
authority to invest the funds in the way and
manner it deems fit to achieve its objective of
earning profits, but without contravening
Shari’a precepts. However, Islamic banks also
offer restricted PSIAs to those investors who
are interested in investing their funds in
certain projects which are specified in
advance[12].
PSIAs are redeemable at maturity or at the
initiative of their holders, but not without the
prior consent of the bank[13]. Islamic banks
can refuse to pay holders of PSIAs until the
results of the investments financed by their
funds are determined[14]. In some Islamic
banks (e.g. Kuwait Finance House (KFH),
Jordan Islamic Bank (JIB), Tadamon Islamic
Bank), the contractual agreements that gov-
ern deposits in PSIAs specify that these funds
must remain with the bank for a certain
period before their holders can have access to
them. Certain types of PSIA require deposits
to remain for longer periods (one year or
more) while others cater for shorter periods.
It should be noted that, unlike other types
of PSIAs, savings accounts are usually
redeemable at the initiative of their holders
and without the prior consent of the bank
and, in some Islamic banks (e.g. in the
Sudan), these accounts do not participate in
the bank’s profits and losses.
Uses of funds
In their uses of funds, Islamic banks have so
far mainly focused on seven financial instru-
ments. Musharaka (joint venture) is based on
profit and loss sharing with the recipient
while mudaraba (full funding of project) is
based on profit sharing. The other five instru-
ments are: murabaha (sale of goods at a price
which includes a profit margin agreed by
both parties to the transaction), salam (sale of
goods where the price is paid in advance and
the goods are delivered in the future), istisna’
(acquisition of goods by specification or
order, where the price is paid in advance, but
the goods are manufactured and delivered at
a later date), ijara (operating lease) and ijara-
wa-igtina (lease with optional ownership)[15].
Profit sharing methods
The relationship between Islamic banks and
holders of PSIAs is based on the mudaraba
contract. According to this fiduciary con-
tract, one (or more) party (called rabb-al-
amal – in the case of Islamic banks this would
be holders of PSIAs) entrusts funds for a
specified or unspecified period to the other
party (called mudarib – in this case the
Islamic bank) in the capacity of an investor
and not as a lender, for carrying on trade,
investment or service with the objective of
generating profits. The Islamic bank con-
tributes its managerial and entrepreneurial
services. Holders of PSIAs are sleeping part-
ners and, although they have the right to
specify the conditions governing the invest-
ment of their funds, they have no control over
the management of the bank.
The profits that result from investing the
funds of these accounts are shared by the
parties to the mudaraba contract according
to a predetermined ratio agreed on before the
Rifaat Ahmed Abdel Karim
The impact of the Basle
capital adequacy ratio
regulation on the financial
and marketing strategies of
Islamic banks
International Journal of
Bank Marketing
14/7 [1996] 32–44
implementation of the contract. As owners of
the bank, shareholders receive a share in this
profit as a reward for the efforts which their
agent – the management of the bank – exerts
in investing PSIAs’ funds[16]. Islamic banks
call this the mudarib share of profit. This
cannot be an absolute amount or a fixed
remuneration[17].
As the provider of funds, however, holders
of PSIAs bear the full risk of loss resulting
from normal business causes or natural
causes pertaining to their investments, but
only to the extent of the amount deposited in
their accounts and no more. Hence, like hold-
ers of unit trusts in mutual funds, at the end
of the financial year the value of PSIAs would
be reduced by their appropriate share of loss
as reflected in the value of their related
assets. However, to cater for this risk, some
Islamic banks (e.g. JIB, Faysal Islamic Bank
of Bahrain (FIBB)) have established an invest-
ment risk allowance fund to act as an initial
buffer for expected losses[18]. On the other
hand, the Islamic bank, as a mudarib,
receives no reward for its service of manag-
ing the funds of investment account holders;
its loss amounts to the opportunity cost of its
services.
Most Islamic banks invest PSIAs in the
same investment portfolio of shareholders. In
this case, profits and losses are allocated
according to the contributed funds of each
source. This means that shareholders’ total
share of profit would consist of:
1 the profits generated from investing equity
funds; and
2 their share in the profits of PSIAs (i.e. the
mudarib share of profit).
Islamic banks can also use one of two profit
sharing methods to govern the relationship
between shareholders and PSIAs. These may
be called the “pooling method” and the “sepa-
ration method”. The decision on which
method to use is to a large extent influenced
by the bank’s in-house religious advisers[19].
The two methods mainly differ over two
issues:
1 should PSIAs share in all types of revenues
and expenses of the bank; or
2 should PSIAs only participate in the rev-
enues and expenses pertaining to their
investments?
The latter expenses do not include the admin-
istrative expenses of the bank.
According to the pooling method, all
sources of funds made available to the bank
should share in all forms of both revenue and
expense. But this would not include revenues
generated by subsidiary and affiliated compa-
nies or the remuneration of the bank’s direc-
tors and auditors. KFH and Bahrain Islamic
Bank are two of the Islamic banks which use
this method of profit sharing.
On the other hand, the separation method
calls for segregating the revenues and
expenses of investments operations from
those of other banking services, PSIAs only
being allowed to share in the revenues and
expenses related to the former type. Other
revenues and expenses, including all admin-
istrative expenses and directors’ and audi-
tors’ remuneration, are solely borne by the
shareholders. JIB, FIBB, and Faisal Islamic
Bank in Sudan (FIBS) are examples of banks
that use this method.
Like the pooling method, some Islamic
banks which use the separation method treat
PSIAs as on-balance sheet items and (incor-
rectly) list them under liabilities. In addition,
both PSIAs and equity funds are invested in
the same investment portfolio and thereby
run the same business risk. Other Islamic
banks (e.g. FIBB and Arab Islamic Bank),
which use the separation method, treat PSIAs
as an off-balance sheet item and they may or
may not be invested in the same investment
portfolio of equity funds.
In the next section, the Basle framework
will be examined in the light of the above
description of the financial system of Islamic
banks.
The application of the Basle
framework to Islamic banks
The preceding description of the financial
system of Islamic banks suggests that PSIAs,
which are one of the important sources
through which these institutions mobilize
funds, perform some of the basic functions of
capital. And although they are not perma-
nently available, PSIAs bear risk in aspects
similar to equity capital. Hence, it is arguable
that since
capital adequacy is about risk of the total
portfolio position of a bank (Llewellyn, 1989,
p. 444)
and since
anything that reduces risk, or shifts risks
away from the bank, or in any way protects
against it, is a factor [or a source] lessening
the need for capital (Llewellyn, 1988, p. 11)
then PSIAs should play a major role in the
calculation of the CAR for Islamic banks.
However, if the Basle framework is to be
applied to Islamic banks in its present form,
then regulatory authorities would face the
problem of how to treat PSIAs.
Based on the previous description of their
characteristics, four possible scenarios can
be developed for the treatment of PSIAs by
regulatory authorities. The choice of which
[ 35 ]
Rifaat Ahmed Abdel Karim scenario to adopt can be left to national dis-
The impact of the Basle cretion, as is the case with a number of items
capital adequacy ratio in the Basle framework. The four scenarios
regulation on the financial are discussed next.
and marketing strategies of
Islamic banks The first scenario suggests that since PSIAs
share in the profits and losses of the bank,
International Journal of
Bank Marketing they possess two basic characteristics of
14/7 [1996] 32–44 capital. These are:
1 “to absorb operating losses while enabling
the bank to stay in business”; and
2 “to enable the bank to absorb risks and
sustain shocks while continuing to oper-
ate” (Llewellyn, 1989, p. 444).
However, it depends on which profit sharing
method the bank is using. If it is the pooling
method, then PSIAs share in all the losses of
the bank except those which are the exclusive
responsibility of shareholders[20]. In this
case, Islamic banks can argue that PSIAs
would qualify to be added to the core capital
elements. Table I shows that, according to
this scenario, Al-Siddiq bank[21] would have
a CAR of 78.4 per cent which is much higher
than the 8 per cent required by the Basle
committee.
However, one of the caveats of this scenario
is that, since current accounts cannot be paid
from PSIA funds (because only shareholders
are entitled to receive the revenues generated
Table I
Balance sheet of Al-Siddiq Bank as at 31 December 1991
(Thousands)
Various assets $509,000
Represented by:
Current accounts 176,000
Investment and savings accounts (PSIA) 300,000
Miscellaneous provisions (Tier 2) 11,500
Asset revaluation reserves (Tier 2) 6,000
Paid-up capital (Tier 1) 4,700
Statutory reserves (Tier 1) 5,300
General reserves (Tier 1) 3,500
Retained earnings (Tier 1) 2,000
Total $509,000
Assuming that the total risk weighted assets is equal to $425,000,000 then:
Scenario 1 (PSIAs added to Tier 1 capital):
(Tier 1 items + Tier 2 items)/risk weighted assets =
(315,500,000 + 17,500,000)/425,000,000 = 78.4 per cent
Scenario 2 (PSIAs deducted from total risk-weighted assets):
(Tier 1 + Tier 2 items)/risk-weighted assets – PSIAs)
33,000,000/(425,000,000 – 300,000,000) = 26.4 per cent
Scenario 3 (PSIAs added to Tier 2 capital):
(Tier 1 items + Tier 2 items)/risk-weighted assets
[15,500,000 + (317,500,000 – 302,000,000)]/425,000,000 = 7.3 per cent
Scenario 4 (the status quo: PSIAs not added to Tier 1 or Tier 2):
(Tier 1 items + Tier 2 items)/risk-weighted assets
[15,500,000 + (17,500,000 – 2,000,000)]/425,000 = 7.3 per cent
[ 36 ]
from investing current accounts funds), then
the treatment of PSIAs as one of the items of
core capital may give a misleading picture of
the bank’s capital ability to absorb losses and
still meet its obligations. Accordingly, regula-
tory authorities may consider setting a limit
to the amount of PSIA that can be included in
the Tier 1 items.
If, however, an Islamic bank is using the
separation method, then the share of PSIAs
in the bank’s losses is confined to the losses
emanating from the investments into which
their funds have been invested. Accordingly,
they are neither compensated with equity
funds nor do they act as a cushion for absorb-
ing losses other than those which are attrib-
uted to their own investments. In other
words, they bear their own risk. In this case,
PSIAs may not qualify to be added to the
capital elements. Hence, the second scenario
proposes that, since PSIAs only bear their
share of risk in the investments into which
their funds were placed, then they (PSIAs)
should be deducted from the total risk-
weighted assets. This treatment overcomes
the caveat produced by the first scenario.
Table I shows that, according to the second
scenario, Al-Siddiq bank would have a CAR of
26.4 per cent[22] which also is much higher
than what is required by the Basle committee.
The third scenario maintains the view that,
although PSIAs share in the profits and losses
of the bank, they are not a perfect substitute
to equity capital which is permanently avail-
able. Rather, they are more akin to hybrid
capital instruments. Although investment
accounts are unsecured and are able to sup-
port losses on an ongoing basis without trig-
gering liquidation, they are redeemable at
maturity or at the initiative of the holder but
not without the prior consent of the bank[23].
Furthermore, unlike hybrid capital instru-
ments, PSIAs do not carry an obligation to
receive profits if they are not achieved by the
bank. Hence, it can be argued that PSIAs
should be classified with Tier 2 capital ele-
ments.
However, scenario 3 is not without prob-
lems. According to the Basle framework, the
total of Tier 2 elements should not exceed 50
per cent of a bank’s capital base. Hence, in the
case of Al-Siddiq bank, this means that
$302,000,000 should be deducted from Tier 2
capital, i.e. the total amount of PSIAs and an
additional $2,000,000. Table I shows that,
according to this scenario, Al-Siddiq bank
would have a CAR of 7.3 per cent and it would,
therefore, be obliged to raise enough Tier 1
capital to reach 4 per cent or to reallocate its
assets in favour of lower risk-weighted
categories.
Rifaat Ahmed Abdel Karim
The impact of the Basle
capital adequacy ratio
regulation on the financial
and marketing strategies of
Islamic banks
International Journal of
Bank Marketing
14/7 [1996] 32–44
Hence, the treatment of PSIAs as a Tier 2
capital item would not be of help in meeting
the CAR requirements for regulatory pur-
poses by Islamic banks which have a similar
balance sheet structure as that of Al-Siddiq
bank. Indeed, it would tend to disadvantage
those Islamic banks (e.g. KFH) which attempt
to achieve growth by pursuing a financial
strategy that aims at mobilizing funds mainly
through PSIA financing (see Karim and Ali,
1989).
The fourth scenario depicts the present
situation in which the characteristics of
PSIAs are ignored and the Basle framework is
applied without any adjustment to the capital
elements or deductions from the total risk-
weighted assets. According to Table I, Al-
Siddiq bank continues to have a deficiency of
Tier 1 capital, and Tier 1 plus Tier 2 capital
will be constrained by the amount of Tier 1
capital. The 50 per cent limit would apply to
non-deposit sources of Tier 2 capital (i.e.
$2,000,000 should be deducted) and Tier 1 plus
Tier 2 ratio would be 7.3 per cent. Like the
third scenario, the bank would be obliged to
raise enough Tier 1 capital to reach 4 per cent
or to reallocate its assets in favour of lower
risk-weighted categories.
The theme emerging from the proposed
four scenarios suggests that PSIAs can be:
1 classified as a core capital element;
2 deducted from the risk-weighted assets;
3 added to Tier 2 capital elements; or
4 ignored.
The other side of the Basle framework, which
is expected to affect Islamic banks negatively,
is the allocation of risk weights to assets to
cater for credit risk. Given the principles
which govern their operations, Islamic banks
do not provide loans. Rather, the structure of
their assets reflects the instruments through
which they invest their resources (in addition
to the banks’ premises, plant and equipment
and other fixed assets).
As stated earlier, these would include trans-
actions conducted through murabaha (sale of
assets on instalments), salam (advance cash
purchase of products at a predetermined
price), istisna’ (advance payment for manu-
facturing of goods that are delivered at a later
date), musharaka (joint venture between the
bank and the customer), mudaraba (full fund-
ing of project by the bank and it bears all the
risk in case of loss), ijara (operating lease)
and ijara-wa-igtina lease with optional own-
ership).
It should be noted that, with the exception
of the instalments of murabaha transactions
and forward deals of salam and istisna’, none
of the other instruments deals with credit
claims. Such a situation would disadvantage
Islamic banks. On the one hand, the nature of
the financial instruments other than
murabaha, salam and istisna’ is not catered
for in the Basle framework. On the other
hand, murabaha is the most widely used by
Islamic banks (Ahmad, 1987; Karim and
Abdallah, 1995) and almost all sales through
this instrument are directed towards the
private sector and hence, according to the
risk weights suggested by the Basle frame-
works, would attract 100 per cent weight.
The irrelevance of the Basle framework to
Islamic banks would put the regulatory
authorities in the concerned countries in an
unenviable situation. If the whole banking
sector is “Islamized”, then a major departure
from the recommendations of the framework
would be required to make it compatible with
the characteristics of Islamic banks. This
would belittle one of the fundamental objec-
tives of the framework which is to achieve a
high degree of consistency in its application
to banks in different countries. Nevertheless,
it may be argued that, since Islamic banks are
different in nature, then issues of competitive
neutrality are not strictly relevant.
On the other hand, if the banking industry
is heterogeneous, then this would mean that
regulatory authorities would have to use an
adjusted framework in addition to that of
Basle in order to measure the capital ade-
quacy of Islamic banks. Hence, the whole
banking sector would not be subject to the
same capital adequacy measure. This also
would cast doubt on the consistency objective
of the Basle framework.
In the light of the above analysis, the next
section examines the implications of the CAR
regulation on the financial and marketing
strategies of Islamic banks.
Implications of CAR on the
financial and marketing strategies
of Islamic banks
Under the profit sharing method, sharehold-
ers of Islamic banks can afford to increase
their share of profits without increasing their
equity capital or incurring an additional risk.
Since an Islamic bank invests PSIA funds on
behalf of their owners, its shareholders are
entitled to receive a percentage of the profits
which are generated from such investments
without incurring any liability to these
accounts in case of loss. This is because
PSIAs bear their own risk and do not have a
first claim on the bank’s earnings or assets.
Hence, any increase in these deposits does
not create any financial risk for the bank.
It follows that one of the financial strategies
that can best serve the interests of
[ 37 ]
Rifaat Ahmed Abdel Karim
The impact of the Basle
capital adequacy ratio
regulation on the financial
and marketing strategies of
Islamic banks
International Journal of
Bank Marketing
14/7 [1996] 32–44
[ 38 ]
shareholders is to keep their equity capital to
the minimum level possible and at the same
time maximize PSIA financing. This would
mean that every extra pound generated from
investing PSIA would increase the rate of
return of shareholders at no extra risk, other
things being equal and constant. Hence, con-
trary to the objectives of the Basle frame-
work, such a financial strategy would not
make equity capital of central concern to
Islamic banks.
On the other hand, since the returns of
holders of PSIAs are directly determined by
the profits (losses) generated by the bank,
their decision to invest or continue to invest
with a particular Islamic bank would mainly
depend on the risk of the projects in which
their funds are invested, the returns which
they expect to receive from those projects
compared with returns from other similar
risk class projects, and the bank’s ability to
achieve those returns. However, in countries
where there is only one Islamic bank, deposi-
tors who are keen to adhere to their religious
faith in their financial dealings may not have
many options from which to choose.
KFH and JIB are two of the largest Islamic
banks which, during the period 1979-1994 and
1980-1994 respectively, have managed to pur-
sue a financial strategy that mainly depended
on increasing PSIA financing and keeping
equity capital at a minimum (see Figures 1
and 2). However, environmental factors (e.g.
regulatory authorities, market competition
(see Duncan, 1972)) can force Islamic banks
not to implement such a strategy. Figure 3
shows that, during the period 1979-1994, the
financial strategy followed by FIBS tended to
depend on current accounts as the bank’s
main source of funding rather than PSIAs.
This was coupled by an increase in equity
capital in 1983 to cater for the increased liabil-
ity of current accounts. Karim and Ali (1989)
claim that FIBS was forced into such a strat-
egy because the regulatory authorities in the
Sudan subjected the bank to different rules
from the ones granted to it during the early
years of its operations. This, Karim and Ali
argue, seems to have reduced the bank’s abil-
ity to service PSIAs competitively and,
accordingly, in 1983 the bank opted to stop
accepting PSIAs.
The enforcement of the Basle CAR also is
likely to have an impact on the financial and
marketing strategies of Islamic banks. How-
ever, whether or not Islamic banks would be
negatively impacted by such requirements
depends on the scenario to be adopted by
regulatory authorities.
According to the first scenario, PSIA should
be added to the core capital elements. Islamic
banks like KFH and JIB, which are pursuing
a financial strategy of increasing PSIA
financing, would tend to benefit from this
scenario. The high strategic choice provided
by this scenario would also mean that these
banks are likely to pursue a marketing strat-
egy of expanding their market share of these
accounts in order to fulfil their financial
strategy. In addition, not only would this
scenario help these banks to comply with the
CAR regulation, but also it would enable
them to increase the rate of return of share-
holders at no extra risk and without having to
increase their equity capital.
On the other hand, this scenario would
encourage Islamic banks like FIBS to change
their financial strategy as well as to adjust
their marketing strategy to focus their efforts
on mobilizing more funds through PSIAs if
they were to meet the CAR requirements
without having to increase equity capital or
reallocate their assets in favour of lower risk-
weighted categories. Indeed, Islamic banks
like FIBS may be forced to follow other
Islamic banks which change their financial
strategies and pursue an aggressive market-
ing strategy to increase their market share of
PSIAs in order to enable their shareholders to
reap the benefits of high PSIA financing.
If, however, a limit is set to the amount of
PSIAs that can be included in Tier 1, then,
depending on their balance sheet structure,
Islamic banks may find it necessary to raise
equity capital and/or restructure their assets
in order to meet the CAR requirements. This
would also mean that Islamic banks are likely
to adopt a marketing strategy of maintaining
their market share of PSIAs, as there would
hardly be incentives to attract more funds
through these accounts.
The second scenario proposes that PSIAs
should be deducted from the total risk-
weighted assets of the bank. One of the impli-
cations of this scenario is that Islamic banks
like KFH and JBM would be encouraged to
continue implementing both their financial
strategy of bolstering PSIA financing and
their marketing strategy of expanding their
market share of these accounts. This is
because the more funds raised through these
accounts, the less would be the total risk-
weighted assets, and the higher would be the
bank’s CAR, other things being equal.
An additional advantage of this scenario is
that the deduction of PSIA financing from the
total risk-weighted assets would help Islamic
banks to compensate for the assets that are
allocated a high risk weight. This would act
as an extra bonus for attracting more PSIA
financing. However, Islamic banks would still
have to ensure that the percentage of their
core capital is in line with what is stipulated
by the Basle framework.
Rifaat Ahmed Abdel Karim
The impact of the Basle
capital adequacy ratio
regulation on the financial
and marketing strategies of
Islamic banks
International Journal of
Bank Marketing
14/7 [1996] 32–44
Like the first scenario, the second scenario
would urge Islamic banks like FIBS, which
depend on current accounts financing, to
change their financial strategy as well as
their marketing strategy to promote PSIA
financing if they were to meet the CAR
requirements without having to inject extra
equity capital. Otherwise, competition may
force these banks to change their financial
strategies.
This scenario is likely to appeal both to
regulatory authorities and Islamic banks
perhaps more than the first scenario. On the
one hand, it satisfies the core capital require-
ments stipulated by the Basle framework
without any adjustments. On the other hand,
it caters for the inclusion of PSIAs in the
calculation of CAR and also avails Islamic
banks of the opportunity to adopt a financial
strategy that satisfies the CAR regulation and
increases the rate of return of their share-
holders at no extra risk.
The third scenario calls for classifying
PSIAs with Tier 2 capital elements. The con-
straint that the total of Tier 2 capital elements
should not exceed 50 per cent of the total of
both tiers means that PSIA financing would
be used in Tier 2 capital only to the extent
that the total of Tier 2 capital does not exceed
the total of Tier 1 capital. Indeed, in situa-
tions where the total of other items of Tier 2
capital already equals the total of Tier 1 capi-
tal, PSIA financing would not be included in
the calculation of the CAR. The adoption of
this scenario would further imply that
Islamic banks are likely to pursue a market-
ing strategy of maintaining their market
share of PSIAs, as there would be no incen-
tives to attract more funds through these
accounts.
Hence, Islamic banks like KFH and JIB are
likely to find it necessary to invest funds
mobilized through PSIAs in assets that
attract low risk weightings if they were to
continue enjoying the benefits of high PSIA
financing and avoid having to increase equity
capital. However, such an option would not be
easily implemented given that Islamic banks
rely heavily on the financial instrument of
murabaha in their investments which would
attract 100 per cent risk weightings because
they are mainly directed towards the private
sector. On the other hand, the financial strat-
egy of Islamic banks like FIBS that focus on
current accounting financing would be of
little help to them in this scenario. These
banks are also likely to adjust their market-
ing strategy to focus on promoting products
other than current accounts.
The fourth scenario represents the present
situation in which no adjustments are intro-
duced to the Basle framework to cater for
PSIAs. In this scenario, PSIA financing would
hardly be of help to Islamic banks which have
a CAR below the stipulated 8 per cent and are
pursuing a financial strategy similar to that
of KFH and JBM or FIBS. Such banks would
have no option but to increase their equity
capital (as suggested by Figures 1, 2, and 3)
according to the conditions of Tier 1 and Tier

Figure 1
Kuwait Finance House: main sources of funds 1979-1994
Millions Kuwaiti dinars (thousands)
1,000
900
800
700
600
500 Key
Equity
400 Investment accounts
Current accounts
300
200
100
0
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Source: Kuwait Finance House Annual Reports 1979-1994

Notes: Equity = paid-up capital and reserves. Investment accounts also include
savings accounts. Owing to the Iraqui invasion of Kuwait, the bank produced
one set of financial statements which covered 1990 and 1991

[ 39 ]
Rifaat Ahmed Abdel Karim Figure 2
The impact of the Basle Jordan Islamic Bank: main sources of funds 1980-1994
capital adequacy ratio
regulation on the financial Millions Sudanese pounds
and marketing strategies of 10,000
Islamic banks
International Journal of 9,000
Bank Marketing
14/7 [1996] 32–44 8,000
7,000
Key
6,000 Equity
Investment accounts
5,000 Current accounts
4,000
3,000
2,000
1,000
0
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Source: Faisal Islamic Bank – Sudan Annual Reports 1979-1994

Notes: Equity = paid-up capital and reserves. Investment accounts do not include
any other account

Figure 3
Faisal Islamic Bank – Sudan: main sources of funds 1979-1994
Millions Sudanese pounds
10,000
9,000
8,000
7,000
Key
6,000 Equity
Investment accounts
5,000 Current accounts
4,000
3,000
2,000
1,000
0
1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994

Source: Faisal Islamic Bank – Sudan Annual Reports 1979-1994

Notes: Equity = paid-up capital and reserves. Investment accounts do not include
any other account

2 capital and/or reallocate their assets in
favour of lower risk-weighted categories in
order to comply with the requirements of the
Basle framework. However, like the third
scenario, Islamic banks are unlikely to find it
easy to concentrate their investments in
assets that attract low risk weightings which
would allow their shareholders to reap the
benefits of high PSIA financing. On the other
hand, like the third scenario, the adoption of
this scenario would also mean that Islamic
banks like KFH and JIB would tend to pursue
a marketing strategy of maintaining their
market share of PSIAs, as there would be no
incentives to attract more funds through
these accounts while Islamic banks like FIBS

[ 40 ]

Table II
Summary of the impact of the four scenarios on the financial and marketing strategies of Islamic banks
1 2
Added PSIAs to core capital
Islamic banks pursuing a financial strategy of
high PSIA financing and low equity capital
would benefit from this scenarios as follows:
• They would be able to meet the CAR
requirements without having to change their
financing strategy.
• Their shareholders would be able to con-
tinue reaping the fruits of high PSIA financ-
ing.
The high strategic choice provided by this
scenario would also mean that these banks
are likely to pursue a marketing strategy of
expanding their market share of these
accounts in order to fulfil their financial strat-
egy.
Islamic banks like FIBS would be encour-
aged to change the emphasis in their financial
strategy from current accounts financing to
PSIA financing. Indeed, competition would
force these Islamic banks to pursue a market-
ing strategy that would enable them to
increase their market share of PSIAs in order
to fulfil their financial strategy.
However, if only a limited amount of PSIA
financing is allowed in the calculation of the
CAR then depending on its balance sheet
structure, the bank may find it necessary to
raise equity capital and/or restructure its
assets in order to meet the CAR requirements.
This would also mean adopting a marketing
strategy of maintaining the bank’s market
[ 41 ]
share of PSIAs.
Scenarios
Deduct PSIAs from total risk-weighted assets
Islamic banks pursuing a financial strategy of
high PSIA financing and low equity capital
would benefit from this scenario as follows:
• Increase their CAR.
• Reduce total risk-weighted assets.
• Compensate for assets that are allocated
high risk weightings.
• Shareholders would be able to continue
reaping the fruits of high PSIA financing
while keeping their equity capital at a
minimum.
These Islamic banks would be encouraged to
continue their marketing strategy of expanding
their market share of PSIAs.
Islamic banks like FIBS would find it neces-
sary to change the emphasis in their financial
strategy from current accounts financing to
PSIA financing. They would also tend to revise
their marketing strategy to fit their financial
strategy of attracting more PSIAs.
3 4
Add PSIAs to Tier 2 capital elements
The use of PSIA financing would be
constrained by the Basle condition that the
total of Tier 2 capital elements should not
exceed 50 per cent of the total of the two
Tiers.
Given the nature and financial instruments
of their investments which attract high risk
weightings, Islamic banks like KFH and JIB are
unlikely to find it easy to invest funds mobi-
lized through PSIAs in assets that attract low
risk weightings in order to be able to continue
enjoying the benefits of high PSIA financing
and avoid having to increase equity capital.
The adoption of this scenario would further
imply that these Islamic banks are likely to
pursue a marketing strategy of maintaining
their market share of PSIAs as there would be
no incentives to attract more funds through
these accounts.
The financial strategy of Islamic banks like
FIBS that focus on current accounting financ-
ing would be of little help to them in this
scenario. These banks are also likely to adjust
their marketing strategy to focus on promoting
products other than current accounts.
Islamic banks
Bank Marketing
14/7 [1996] 32–44
capital adequacy ratio
International Journal of
The impact of the Basle
regulation on the financial
Rifaat Ahmed Abdel Karim
and marketing strategies of
The status quo: no adjustments
Islamic banks, particularly those which have a
CAR below the stipulated 8 per cent and are
pursuing a financial strategy similar to that of
KFH and JBM or FIBS, are unlikely to make use
of PSIA financing and would have no choice
but to increase equity capital or restructure
their assets to reduce their risk weightings.
However, the latter option would not be imple-
mented easily given the nature of, and the
financial instruments used in, the investments
of Islamic banks which would attract high risk
weightings.
Islamic banks like KFH and JIB would tend
to pursue a marketing strategy of maintaining
their market share of PSIA while Islamic banks
like FIBS are likely to adjust their marketing
strategy to focus on promoting products other
than current accounts.
If shareholders are to reap the benefits of
high PSIA financing, then Islamic banks would
have to concentrate their investments in
assets that attract low risk weightings.
Rifaat Ahmed Abdel Karim
The impact of the Basle
capital adequacy ratio
regulation on the financial
and marketing strategies of
Islamic banks
International Journal of
Bank Marketing
14/7 [1996] 32–44
[ 42 ]
are likely to adjust their marketing strategy
to focus on promoting products other than
current accounts.
Table II gives a summary of the four scenar-
ios. It shows that scenarios 1 and 2 would
achieve a congruence between the Basle CAR
requirements and the financial strategy of
Islamic banks like KFH and JBM which aims
at increasing PSIA financing while keeping
equity capital at a minimum. The marketing
strategy of these banks would focus on
expanding their market share of PSIA. On the
other hand, Islamic banks like FIBS would be
encouraged to change their financial strategy
and adjust their marketing strategy accord-
ingly to enjoy the benefits of PSIA financing.
However, whereas in scenario 1 a limit may
be set for the amount of PSIA financing to be
included in Tier 1 capital, scenario 2 provides
an additional advantage of using PSIA financ-
ing to reduce the total risk-weighted assets of
Islamic banks, thereby helping in increasing
their CAR. Unlike the former scenario, in
which Islamic banks are likely to adopt a
marketing strategy of maintaining their
market share of PSIAs, scenario 2 would tend
to encourage these banks to adopt a market-
ing strategy that aims at capturing more
share of PSIA market.
On the other hand, unlike the first and
second scenarios, in scenarios 3 and 4 the
financial strategy of promoting PSIA financ-
ing would hardly be of help to Islamic banks
in meeting the CAR requirements. In addi-
tion, given the nature and the financial
instruments of the investments of Islamic
banks, which would attract high risk weight-
ings, it is unlikely that their shareholders
would reap the benefits of high PSIA financ-
ing. This would also imply that Islamic
banks would tend to adopt a marketing strat-
egy of maintaining their share in the PSIA
market.
The theme emerging from the analysis of
the four scenarios suggests that both the
financial and marketing strategies of an
Islamic bank would be contingent on the
scenario to be adopted by regulatory authori-
ties for the treatment of PSIA financing. This
in turn would determine whether or not
shareholders would be able to increase their
rate of return at no extra risk.
Concluding remarks
The Shari’a, which governs Islamic banks in
all their transactions, prohibits the receipt
and payment of interest, among other things.
Islamic banks mobilize funds on the basis of
profit sharing and use different methods in
their application of funds. Some of these
methods are also based on profit sharing.
The Basle Accord, which came into effect in
1992, stipulates the minimum CAR which
banks have to achieve and specifies how it
should be measured. Capital is split into two
tiers and is related to total assets weighted by
their risk.
This paper develops four possible scenarios
for the treatment of PSIAs by regulatory
authorities and examines their implications
on the financial strategies of Islamic banks in
the light of the risk-return relationship of
shareholders and PSIAs. It is argued that the
scenario to be adopted by regulatory authori-
ties would tend to influence both the financial
and marketing strategies of Islamic banks.
This in turn would determine whether or not
shareholders would be able to keep their
equity capital at a minimum and increase
their rate of return at no extra risk.
Notes
1 Shari’a is the sacred law of Islam. It is derived
from the Quran (the Muslim Holy Book), the
Sunna (the sayings and deeds of Prophet
Mohammed), Tjma (consensus), Qiyas (reason-
ing by analogy) and Maslaha (consideration of
the public good or common need).
2 Riba is translated strictly as usury, but inter-
preted universally as interest.
3 Similarly, ethical mutual funds in the West do
not invest in companies that fail to meet their
social criteria. See Owen (1990) and Perks et al.
(1992) for more details on social investments.
4 See chapter 4 in Gambling and Karim (1991) for
more details on the development of business
organizations and financial institutions
within Islam.
5 This is a standing committee of the Governors
of the Group of Ten major industrial countries
based in Basle, Switzerland. Its task is to pro-
mote supervisory co-operation and co-ordina-
tion mainly in the field of banking. The com-
mittee has no direct authority other than the
weight of its collective opinion and the support
of the Central Bank Governors. Its recommen-
dations are implemented in its member coun-
tries and many other countries around the
world.
6 See the International Convergence of Capital
Measurement and Capital Standards published
by the Committee on Banking Regulations and
Supervisory Practices (1988).
7 This includes issued and fully paid ordinary
shares/common stock and non-cumulative
perpetual preferred stock (but excluding
cumulative preferred stock).
8 In this paper, the term profit sharing invest-
ment accounts (PSIA) is used to refer to both
savings and investment accounts. This does
not include current accounts because they are
Rifaat Ahmed Abdel Karim
The impact of the Basle
capital adequacy ratio
regulation on the financial
and marketing strategies of
Islamic banks
International Journal of
Bank Marketing
14/7 [1996] 32–44
not accepted on the basis of profit sharing as
the other two types of accounts.
9 Unlike Western commercial banks which pay
interest on some current accounts, Islamic
banks are prohibited to pay interest on current
accounts or any other type of deposits.
10 In markets where competition is high, some
Islamic banks (e.g. Kuwait Finance House)
attempt to attract funds in PSIAs by offering
their holders the opportunity to share in the
revenues from current accounts but without
holding them accountable for these accounts if
there were losses.
11 This is the position adopted by the Accounting
and Auditing Organization for Islamic Finan-
cial Institutions (1993) – the body established
to regulate the financial reporting by Islamic
banks – in its Financial Accounting Statement
No. 2: Concepts of Financial Accounting for
Islamic Banks and Financial Institutions.
PSIAs would neither be listed under liabilities,
as is currently the practice of almost all
Islamic banks, nor would they be included
with owners’ equity funds. Hence, the formula
of the balance sheet of an Islamic bank should
be: assets = liabilities + profit sharing invest-
ment accounts + owners’ equity.
12 The Accounting and Auditing Organization for
Islamic Financial Institutions (1993), in its
Financial Accounting Statement No. 2: Concepts
of Financial Accounting for Islamic Banks and
Financial Institutions, treats restricted invest-
ment accounts as an off-balance sheet item and
requires Islamic banks to report them in a
separate statement.
13 For example, article 45 of the Articles of Asso-
ciation of Kuwait Finance House states that
funds deposited in investment accounts cannot
be withdrawn before maturity or without the
prior consent of the bank.
14 For example, the General Conditions Govern-
ing Investment and Current Accounts of
Faysal Islamic Bank of Bahrain include the
following:
11. In the case of an Investor withdrawing
his/her investment during a month, the
corresponding profit for that month shall
be payable to him/her only after the valua-
tion of assets at the end of that month.
12. Withdrawals before maturity are not
permitted...
15 For more details on the nature and operations
of these mechanisms see Karim and Ali (1988),
Nienhouse (1986), Shirazi (1990) and Wohlers-
Scharf (1983).
16 This does not necessarily mean that share-
holders have to be directors of the bank.
17 This is because such an arrangement would
include a strong element of gharar (risk, spec-
ulation, uncertainty) which is prohibited by
Shari’a. According to Saleh (1992, pp. 135-6),
“the future existence of the promised lump
sum was very uncertain when the promise was
made, and furthermore its actual ratio to the
real profit was totally unknown. Another
reason for the illegality of such an arrange-
ment is that it is not the business risk which is
rewarded but the mere act of remitting money
to the agent-manager [bank]. That amounts to
a ribawa [susceptible to riba] transaction”
(emphasis in original).
18 The General Conditions Governing Invest-
ment and Current Accounts of FIBB state that:
26. Each Investor shall authorize FIB[B] to
deduct up to a maximum of 10 per cent from
his/her net profit in favour of the Reserve
Modarabas Fund as Takafol [solidarity]
among other investors to face any risk
encountered by the assets of the
Modarabas, although FIB[B] may not neces-
sarily always need to make such deduc-
tions.
Similarly, Section 20 (a) in JIB’s Statute states
that:
In order to replenish the special account for
meeting investment risks the Bank shall
deduct annually an amount equal to 20 per
cent of the net profits realised from the
various investment operations during that
year.
19 These are commonly known as Shari’a Super-
visory Board and are employed by the bank to
assure consumers of its services that it is
adhering to the precepts of the Shari’a in its
financial transactions. See Briston and El-
Ashker (1986) and Karim (1990) for more
details on the duties of the Board.
20 For example, losses from subsidiaries, because
they are borne solely by shareholders.
21 This is a fictitious bank.
22 Usually Islamic banks do not invest the full
amount of funds deposited in PSIAs in order to
meet the liquidity requirements of the differ-
ent maturity dates of these accounts. Hence,
the amount not invested should not be
deducted from the total risk-weighted assets.
This is because, according to the contractual
relationship between an Islamic bank and
holders of PSIAs, if the former declares that it
will not invest part of the funds deposited in
PSIAs then the funds not invested are treated
as an obligation on the part of the Islamic bank
and, in the case of loss, they should be paid
from shareholders’ equity. Hence, the need to
hold equity capital to cater for this risk.
23 This does not apply to savings accounts which,
although they share in the profits and losses,
are redeemable at the initiative of the holder
and without the prior consent of the bank.
Hence, they could be excluded from PSIAs.
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[ 43 ]
Rifaat Ahmed Abdel Karim
The impact of the Basle
capital adequacy ratio
regulation on the financial
and marketing strategies of
Islamic banks
International Journal of
Bank Marketing
14/7 [1996] 32–44
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